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09/26/2011

Too Many Government Workers?—Posner

Much of the concern with government deficits in countries as unlike as the United States and Greece focuses on public employees, viewed as overpaid parasites who, being paid by the government, contribute directly to the public debt. And there are indeed good economic reasons to expect the public sector to be less efficient than the private sector. The principal reasons are four: the incentive provided by the profit motive is absent; public agencies tend to be monopolies; public employees are voters; and public employers tend to substitute nonpecuniary for pecuniary emolumens, such as tenure and generous retirement benefits, because the public notices and reacts adversely to high government salaries.

Therefore one might think that the larger the fraction of public employees in a nation’s workforce, the less efficient the nation’s economy, and so the lower per capita GDP would be. (Commonly for international comparisons GDP is translated into U.S. dollars on the basis of estimates of purchasing power parity, and I will do that.) I decided to examine that question empirically, with respect to 27 countries, including the United States and Canada from the Western Hemisphere, Australia, New Zealand, Japan, Taiwan, and Singapore from East Asia, Israel, and all the countries of Western, Northern, Central, and Southern Europe, plus Poland. The countries were not chosen at random, but instead selected as being at least roughly comparable to the United States in their economic system and political culture.

The percentage of public employees in the workforces of these countries ranges from 6.35 percent in Singapore to 33.87 percent in Sweden. Indeed the three lowest countries, and the only ones with fewer than 10 percent public employees, are Japan, Singapore, and Taiwan. The highest countries after Sweden are Denmark (32.3 percent) and Norway (29.25 percent). The remaining Scandinavian country, Finland, is fifth with 26.31 percent. In fourth place, just below Denmark, is Hungary. The other countries with public-employee percentages above 20 percent are Greece (22.3 percent), Canada, and Poland, Greece being the lowest in this group of eight countries, despite all the negative attention its public-employee workforce has received lately.

The rest of the countries in my list (that is excluding the above-20 percent and below-10 percent countries), are grouped pretty tightly between about 12 and 19 percent. The United States is in approximately the middle, with 16.42 percent. Surprisingly, it is well ahead of Israel, Spain, Italy, Germany, France, and Portugal. The European countries with the lowest percentage of public workers are the Netherlands and Austria, but Portugal is only slightly above the Netherlands.

Per capita income, in purchasing power parity terms, ranges from $17,537 in Poland to $53,748 in Norway; interestingly, both have very high percentages of public employees. Regression analysis reveals no systematic correlation between percentage of public employees and per capita GDP, except that the Scandinavian countries as a group exhibit a statistically significant positive correlation between those two variables, if the Asian countries are treated as a separate variable—Singapore has the second highest GDP per capita after Norway, yet the lowest percentage of public employees.

The upshot is that there does not appear to be a relation between a country’s prosperity and the number of public employees it has. (Or between population and the percentage of public employees, though one might expect that, given fixed costs of government, the percentage of public employees would be higher the smaller the population. Singapore is a dramatic refutation of the point, as it has a population of only 4.6 million, one of the lowest of the 27 countries, yet it has the lowest percentage of public workers.)

A more sophisticated analysis would cover more countries (there are 195 countries in the world) and correct for more variables; obviously there is much that affect a nation’s prosperity besides the percentage of its public employees. I am nevertheless surprised that my crude analysis should yield no correlation between per capita GDP and percentage of public workers in a nation’s workforce. The critical omitted variable may be the jobs the public employees do. Are they teachers? Bank examiners? Revenue agents? Food and drug inspectors? Air traffic controllers? Police officers? Medical workers? Or are they railroad workers or other employees of business enterprises owned by the government, politicians’ relatives, licensing officials taking bribes from small business, or beneficiaries of a spoils system of public employment? It does seem significant, though, that the Scandinavian countries should be as prosperous as they are (though Norway, with a very small population and huge oil reserves, may be a special case) despite having such a high percentage of public workers, and it is equally striking that the East Asian countries (though my sample of them is very small) should be so prosperous despite having such a small percentage of public workers. Perhaps the relation between a nation’s economy and the percentage of its public workers is determined by a political and social culture that determines what tasks are assigned to government, what incentives and constraints are placed on public workers, and who is attracted to public service. Maybe, with the right conbination, public service can be as economically productive as private enterprise.

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A pity that Becker and Posner took the week off from providing the rational anchor for this blog. Six more days of Jack and NEH debating the merits of battery or solar or wind or wishful-thinking powered war machines will seem like an eternity. Meet the Flintstones, circa 21st century. Yabba dabba doo!

Tans! In the interim let's research the best alternatives to that of tanking our economy by being so vulnerable to manipulated prices of NON_renewables! Have you noticed the coincidence of what's extorted from us for imported oil is about the same as our nation weakening trade deficit?

Here's a couple of sites on wind you might enjoy and perhaps learn from:

http://awea.org/

http://en.wikipedia.org/wiki/Wind_power

Man! not long ago a ONE meg windmill was BIG, now, new installed capacity is averaging 1.5 megs and they go up to seven!

Even though Alaska has lots of fossil fuel options and Anch has NG right in our front yard we're going ahead with a 42 meg "kick off" project that will produce about 10% of Anch consumption, and in a more rural area they ARE tapping a geothermal source seemingly to good end. Compared to $8 diesel feeding a bank of Cat diesels 24/7 a lot of the alternatives are looking pretty good.

BTW, I wonder what part of our nation you call home? I've spent some time in OK and other sunbelt areas down there and was really surprised to see ZERO solar on those huge "story and half" steep roofs they build.

They're WAY behind CA, and can you imagine? most of the subdivisions have covenants, not only against a solar installation but, that the SHINGLES have to be a dark color that often bring attic temps into the 130's. To top it off..... the walls of the upstairs rooms are built with "2 x 4's" meaning there is but 3-5/8" to (shoddily) install R-13 insulation. What can we be thinking? And how can we tell China that they should do better?

"Flintstones??" Right there in Tulsa where homes typically eat MORE energy than we use in Alaska (#1 for penetration of Five-Star Energy rated homes) there is a ZERO energy home built not by a college grant but by a lone individual. And not too far away is the town that decided to build to LEED's specifications and be one of the "greenest" cities in the nation.

Things move faster these days, so we'll likely see our grand kids looking at us for a our fuel wasting habits as most of us would look at those risking whale extinction to run lamps and make shoe polish.

Well, enough for now, but with our Chi school guys off on a well-deserved holiday or other activity, perhaps it would be a good time to speculate on why the "new" Miltonesque belief in "The Market" solving most of our conundrums appears to have left us well up the creek as compared to the wealth generation some would have predicted, or hoped for?

BTW does anyone have an estimate of how much of the deficits of the last decade are due to the DOW and other indices being at about the same level as they were in 1999? ie not even much by way of cap gains accrual?

NEH well, once in the mess, if it makes the guys a lot safer than they were in Humvees with canvas "doors" well....... fine.

I couldn't believe the slow pace of "up armoring" Humvees; in WWII we converted car factories to produce airplanes in less time. They were taking as long to upfit Humvees as a small So Cal car shop takes to do a frame up restoration...... with guys dying and being maimed for life. Disgusting.

Jack, I'm from the "Bungle in the Jungle" Age. We couldn't get the Heavies into the areas where they were needed. The closest we could get was using "Daisy Cutters" to create LZ's and then dropping into the tangled mess; then "Hump it" the rest of the way. As for casualties the common response was, "It don't mean a thing - you're a "Grunt", it's just an occupational hazard. Deal with it"! "Rolling Thunder" and Napalm was about as Hi-Tech as it got...

"But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income. Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100% of their income. So anyone who talks about the consumer “coming back” – even after deleveraging – is living in a fantasy world."

NEH...... must have been sheer hell. Somehow by pure luck and eye-sight almost too poor to be in the military, much less the infantry, I spent my draft years in Seoul and Ft Ord.

Two situations are never the same, but we "won" or stalemated? in the Koreas and "lost?" in Vietnam. I'm proud of what the SK's have done from what they had left after armies destroyed the whole place. I'd have thought NK would collapse (perhaps that is the right word) after it was orphaned from whatever support it got from the Soviets and that as with the USSR modern communication made it impossible for them to getaway with lying to the people enough to make them tolerate their miserable conditions. Heart breaking to see a middle aged truck driver looking wistfully across the DMZ as he wonders about his aging relatives who ended up on the N. side.

Observer! Ha! You mean Stiglitz is actually resorting to macro-analytic techniques? Currency flows and LACK of steam in the boiler? Ha-ha..... while partying with some builders and others in the industry before the crash, but when sales had slowed in that area, I quipped "Housing can't recover until housing recovers". Too cryptic of course and generally not heard.

Yes Stiglitz understands that there is NO shopping like a young couple in a leased car with a few thousand for "closing costs" who can "spur" $250,000 of economic activity (plus a four? mulitplier effect) by signing a 30 year mortgage. Then, Ha! there were those signing with no intent beyond a six month "flip".

Yes for a decade the stockmarket was the "third job" then it was "bailing out" with a home equity loan while soaring prices became the "third job". Mebbe there's one coming on the horizon but...... as with housing, I don't see it.

"They find that variation in ozone concentrations at levels well below federal air quality standards have a significant impact
on productivity. Their central estimate suggests that a 10 ppb (parts per billion) decrease in ozone concentration increases worker productivity by 4.2 percent

What are you going to do, now that we have bothered you with the facts.

“There’s a system where we socialize losses and privatize gains,” he continued. “That’s not capitalism, that’s not a market economy, that’s a distorted economy and if we continue with that we won’t succeed in growing, and we won’t succeed in creating a just society.”

The reputation of economics and economists, never high, has been a victim of the crash of 2008. The Queen was hardly alone in asking why no one had predicted it. An even more serious criticism is that the economic policy debate that followed seems only to replay the similar debate after 1929. The issue is budgetary austerity versus fiscal stimulus, and the positions of the protagonists are entirely predictable from their previous political allegiances.

A review of economics education two decades ago concluded that students should be taught ‘to think like economists’. But ‘thinking like an economist’ has come to be interpreted as the application of deductive reasoning based on a particular set of axioms. Another Chicago Nobel Prize winner, Gary Becker, offered the following definition: ‘the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, used relentlessly and
consistently form the heart of the economic approach’.
13
Becker’s Nobel citation rewards him for ‘having extended the domain of microeconomic analysis to a wide range of economic behavior.’ But such extension is not an end in itself: its value can lie only in new insights into that behaviour.
‘The economic approach’ as described by Becker is not, in itself, absurd. What is absurd is the claim to exclusivity he makes for it: a priori deduction from a particular set of unrealistic simplifying assumptions is not just a tool but ‘the heart of the economic approach’. A demand for universality is added to the requirements of consistency and rigour. Believing that economics is like they suppose physics to be – not necessarily correctly – economists like Becker regard a valid scientific theory as a representation of the truth – a description of the world that is independent of time, place, context, or the observer. That is what Prescott has in mind in insisting on the term ‘aggregate economics’ instead of macroeconomics – there is, he explains,
only economics.

observer, Don't forget to rigoursly use and apply the caveat, "But such extension is not an end in itself. Its "value" can lie only in the "new insights" into that behaivor". Somewhere, along the line, this caveat seems too have been forgotten. Oh Well, and as is said, "The rest is History"...

Also, remember the differences between "Apples and Oranges". The same applies to the "Soft Sciences (Econ., Soc., Poli-Sci., etc)" and the "Hard Sciences (Physics, Chem., Biology, etc.)".

Observer???? You make a charge of my being "clueless", however where one would expect supporting data or at least, opinion, there in only a link to one of the economists with whom I most often agree.

In particular, on this occasion he touches upon democracy as it relates to our chosen economic system and indeed all of, at least, the public aspects of our community and America's grand experiment. I too am guilty of similar heresy before the gods of THE market for which I'm not planning any apologies.

I particularly liked his linking of the words "economics" and "democracy" in his address to those indignant as to the capitalism once meant to most effectively develop and DISTRIBUTE the wealth of our nation along with that of other nations opting, one hopes, democratically to harness and regulate its powers to the benefit of THE people and NOT a few who distorted and coopted its mechanisms to advantage themselves and oppress those doing the vast majority of the work and responsible for unlocking the value of OUR resources, labor and creativity.

Stiglitz:
"Before talking about economics, I want to say something about democracy. In July, I was in Spain, talking to the “indignados” there, the protesters. There, I could use a bullhorn. I didn’t have to go through this echo chamber. I realize the pedagogy of having you repeat what I say is very valuable, but it makes the whole process much longer. The fact that you are not allowed to use a megaphone on a Sunday is outrageous! We have too many regulations stopping democracy and not enough regulations stopping Wall Street from misbehaving. You should have the right peacefully and demonstrate your views and not be arrested and not be sprayed with pepper spray.

So now I want to talk a little bit about what I said in Spain, and then about the banks. The protests there are called the “indignados,” and I said, “You are right to be indignant.” The fact is, the system is not working right. It is not right that we have so many people without jobs when we have so many needs that we have to fulfill. It’s not right that we are throwing people out of their houses when we have so many homeless people.

.......... aahh yes, can it be that the "demos" have become aware enough and indignant enough about the few voices who tried to warn being squelched by the powers that continued to destroy our capitalism in an attempt to satiate their insatiable greed, to rise to their duty of "cracy" before it's too late?

But "clueless?" You seem to frivolously fling that one out at other posters with no clarification or supporting effort and at times, when it appears you've not understood the poster.

Observer: Thanks, I guess that's as close to a mea culpa as we're likely to get. As for "the latest material" this Mess is not moving at the pace of the latest Iphone upgrade but has been decades and more in the making. Philosophy and basic tenets such as a working democracy REQUIRING a strong middle class both invested in, and deriving value from the system change even slower. Still, I'm appreciative of news about the most recent volleys, as apparently, working folk have awoken and perhaps reached a critical mass that can no longer be denied.

Ha! In our paper, today's AP article quoted "Wall Streeters" passing protesters on their way to work, feigning? being puzzled about the goals of the assembled working and non-working folk; now THERE's cluelessness!

Four more days. In the temporary absence of this blog's authors, it is entertaining to watch the leftists do their most to devour one another -- behavior that serves as a warning sign to any who may be tempted to follow the siren call of socialism at the expense of the economic liberty on which our Republic was founded.

I am not on the left--I am a straight out of the box Liberal Keynesian, not new Keynesian (Cheney Keynesian), Keynesian. That means tax and spend, not borrow and spend. Obama, et al, have been a total screw up, but not for the reasons you think. You have no idea as to either what is wrong or what we should be doing, nothing, not a clue

Mostly, I take my lead from Robert Dugger, who just posted the following:

"Most observers point to the fall of the Berlin Wall on November 9, 1989, as the watershed moment when the global economy entered a new era. Symbolically this was important, but the more important
economic event was January 1, 1994, when China devalued the yuan by 50%. On that day hundreds of millions of Chinese workers were offered on the world labor market in a half-off sale and began drawing away the manufacturing jobs that were once the backbone of the American middle class. Since then, US median household income stagnated. The Census Bureau recently reported that median household
income in 2010 was the lowest since 1997. US politics have yet to adapt to this hyper-competitive global economy bulging with cheap labor. Instead, policymakers papered over cracks in the foundation of the American economy with tax cuts and stimulus checks starting in 2001. The Fed added its own plaster through low interest rates and eventually “Quantitative Easing”. There were no initiatives to make American workers more competitive. Nor was there much effort to break away from a Cold War fiscal strategy that encouraged debt-financed consumption and suburban expansion. Today, old-growth sectors continue to enjoy the budget advantages of tax breaks and subsidies that are barriers for new sectors poised to grow in the future. As special interests align with increasingly polarized parties, elected officials fight for remaining budget resources on behalf of their backers.

For me, efficiency isn't the main issue. It's the question of who has control over the economy. Should the government have more control or should the private sector? And this isn't even an issue of strictly employment. A privately run prison is run for the government even though the employees are non-government (and I'd argue is overall worse for our way of life due to the profit motive incentives to increase the number of prisoners).

Three more days. Deaf to irony, "an observer" declares itself a liberal Keynesian, but not a leftist. NEH continues its struggle with spelling, punctuation, etc. Scarcely the next best hope of Western Civ.

"In sum, Keynes’s liquidity theory of the operation of financial markets is a rigorous, logically deductive system that appears to be applicable to the real world in which we live and should replace the artificial world model of Lucas and other mainstream economists"

tanstaffl, So typo's and "composition errors" have become the "best argument" that the "New Right" can come up with? As for Composition, they're called an "ellipsis" and have a specific use and meaning in Grammar & Composition (better known as English 101)...

Two more days. Assuming "typo" is used colloquially as a noun, its plural form is "typos," not "typo's." "Typo's" might conceivably be a possessive expression. But it is hard to imagine how a "typo" can possess anything, save perhaps NEH's command of English.

"An observer's" quotation of Davidson concerning Keynes is unimaginative and unresponsive to my point. That is, like flies to honey, leftists are attracted to Keynesian economics.

Tans, Normals, who may appear "on the left" from the positions of those thoroughly imbued with the Clear Channel propaganda that's part and parcel of the ALL FOR THE RICH agenda today's "GOP" no longer even tries to camouflage, ARE free to discuss the issues, but were you "feeling" that the events taking place during the gross negligence of the Bush admin are fine examples of a well tuned capitalism humming away efficiently to distribute the benefits of America's rich resources to THE people? Thnx.

Nelson: Yep.... the prison issue, having become so costly due to a bevy of silly politicians jumping all over each other (to get in front a camera) to appear "tough on crime" is about to burst onto center stage as its soaring costs show up on the radars of those now turned to "cost cutters".

And yes....... the Private-prison game in addition to ginning up more customers also is known for doing a FAR poorer job. Why waste a future customer with costly rehab???

While Rehab percentages have never been spectacular, when we've 3 million lock-up (a rate 5-7 times that of the civilized nations) the diff between a 40% rehab and 50% makes a LOT of diff over time at $30,000 or more per prisoner.

How can we chest thump "We're the best" while locking up our fellow citizens at 5-7 times the rate of the civilized nations AND carry the burden of paying twice as much for H/C often with poorer outcomes?